Year-end planning for participants in stock plans

Dear Bruce:

You show 5 different advisers covering a range of ideas and advice. All have some merit.

But all ignore the most efficient method to reduce taxes and risk. That of course is to efficiently sell exchange traded calls and/or buy puts.

Rarely is selling calls or buying puts prohibited by company stock plans or grant agreements. Insider trading policies refer to all equity transactions whenever persons hold non public material information. That includes sales of stock, sales of calls or buys of puts.

ISS policies suggest that hedging (i.e. doing collars, swaps, and forwards) is problematic when sales of stock are prohibited by the company but are not problematic when sales of stock are not prohibited. And they say their policies only apply to executives.  Sales of "qualified covered calls" are not problematic under any circumstances as far as ISS is concerned.

And there are little restraints against selling calls or buying puts, other than the requirement that there be some equity assets or cash deposited into an account to execute the transactions. Taxes can be friendly and SEC rules are easy to deal with.

Selling calls and/or buying puts as a risk and tax reducing strategy have far greater expected returns with much less risk that a strategy of making premature exercises sell and diversify.

Even just doing nothing until near expiration is superior to premature exercises, sales and diversify. That is why more and more top executives are holding their ESOs to the last minute.

Failure of advisers to promote hedging is similar to asking Drew Brees to  quarterback a Saints game without passing or asking John Lennon to perform without singing. How can an advisor claim expertise when he ignores the only efficient strategy.

Advisers have fiduciary duties to advise efficient risk reduction. And in my view, premature exercise, sales and diversify violates that duty and defeats the object of the grants by eliminating alignment 100%. And there are some who believe that premature exercises sales and diversify violates SEC Rule 10 b-5.

Of course, there are beneficiaries of the early exercise sell and diversify strategy. Those beneficiaries are the company, who recover the forfeited "time value" and get two early cash flows 1.) from the exercise and  2.) from tax credits. The other beneficiary is the adviser who is held in good standing with the company and gets to make fees and commissions on assets under management..

Merry Christmas

John Olagues